What savings account is best for a baby?

Here at Shepherds Friendly Society, we carried out some research and found that 94% of parents said saving money for their child is important to them.

Saving for university fees and helping their children get onto the property ladder were the two most common reasons to save, while following closely behind was building up a lump sum towards a car.

But with so many different choices available, where are the best places to save for a baby? Our guide looks at a range of options.

Junior ISA

Junior ISAs allow you to save for your child in a tax-efficient way. You can save up to £4,080 each tax year into a Junior ISA (tax year 2016/17). Your child can take charge of the account at age 16, but they cannot access the money until it becomes an adult ISA when they are 18.

Like standard ISAs, Junior ISAs can be held in cash or stocks and shares, or you can divide the allowance between both. You don’t pay any personal income or capital gains tax on any growth.

• Junior cash ISA – these work the same as traditional cash ISAs. You will earn any interest without tax being deducted.
• Junior stocks and shares ISA – invest your child’s money in funds, shares, gilts, bonds and investment trusts. The value of your child’s savings can go down as well as up.

Many Junior ISAs allow you to pay in regular amounts as well as lump sums. For example, our Junior ISA lets you save a monthly amount starting at £10 and to add one-off payments from as little as £100.

Friendly society children’s savings plans

Children’s savings plans offered by friendly societies are long-term savings schemes that let you make regular contributions. They are exclusive to friendly societies, and have the advantage of offering tax-efficient saving; something that only the Junior ISA can rival them on in terms of children’s accounts.

Our Young Saver Plan starts from just £7.50 a month and lets you build up a lump sum for your child.

The plan runs for a minimum of ten years and lets you change how much you pay in throughout the term of the plan. There is no income tax or capital gains tax to pay on the growth of the savings and the child’s final lump sum can be accessed tax-free.
A children’s saving account

According to BBA research, children’s savings accounts are the most popular way to save for a baby, with 44 per cent of parents using them.

They work in a similar way to ordinary savings accounts; they are either branch or internet-based and let you save ad hoc amounts whenever you want to.

While these accounts have the advantage of allowing you to pay in and withdraw money whenever you want, any interest earned is liable for tax which could mean that your child’s savings growth is eroded. However, during 2016/17, adults and children will only pay tax if their income exceeds £11,000.

You should also bear in mind, if you give your children money and it makes more than £100 a year before tax in interest, all of this income (not just the income over £100) will be taxed as if it were
your own. [ 1]

An NS&I Children’s Bond

National Savings and Investments Children’s Bonds allow you to save a lump sum over a fixed term for your child.

You can normally invest between £25 and £3,000 per child in each ‘issue’ of the bonds. You receive the interest rate on offer at the time you invest and that rate will be fixed for the 5-year term.

They can change the fixed rate on offer at any time. The interest earned is tax-free, both for the child and the parent or guardian, so it won’t count towards your Personal Savings Allowance.

Withdrawals during the fixed term normally result in a penalty of 90 days’ interest, but at the end of the term you can cash in your bonds with no penalty.

So what savings account is best for a baby?

This depends on you and your attitudes to different methods of saving or investing. Are you happy to take some risk to try to achieve higher returns? Do you value the flexibility of being able to access the money when you want to? Or, would you like your child to receive a tax-free lump sum on their 18th birthday?

To help you decide the best way to save for your child, you should bear in mind these summarised points:

• Saving tax-efficiently could help to build up a larger lump sum.

• Investing could return higher growth, however, when you take out an investment product your capital is at risk and you may get back less than you have put in.

• If you’re saving for the long-term, considered five years or more, then it may be worth thinking about investing, as your child’s money has more growth potential and more time to recover from any periods of poor performance.

• Rates in a children’s savings account may not be fixed, meaning your child could be earning less growth after the initial period has expired.

• Saving into a children’s savings account at your bank could produce lower growth due to current low interest rates, but if it does achieve higher levels of growth then there is a chance that your child could be taxed if it makes more than £100 a year before tax in interest.

• Saving into a Junior ISA will mean that your child will receive a tax-free lump sum on their 18th birthday, but the money will belong to them and you won’t be able to make withdrawals.
We can help with saving for your child

For more information, get in touch with Shepherds Friendly today. Call 0330 311 1606 or email [email protected]

Please note: All information within Your Resource Centre is correct at the time of publication, and we make every effort to keep content accurate. However sometimes information may be out of date. You should not rely on this information when making financial decisions as no financial advice has been given. The information reflects the view of the author and not that of Shepherds Friendly Society.

If you’re not sure what to do when making financial decisions then you should consult a financial adviser, who will likely charge for any advice that is given.

Shepherds Friendly
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1544 Reviews

The whole experience of setting up ISA's for my baby twins was extremely easy. The online application was very straight forward and painless. When I rang customer services to discuss paying lump sums into the ISA's I found the lady I spoke with to be warm, friendly and professional....and dare I say it...British.

KATHLEEN

Staff were friendly on the phone and explained the process well and answered all of my questions.

Shepherds Friendly is a trading name of The Shepherds Friendly Society Limited
which is an incorporated Friendly Society under the 1992 Friendly Societies Act No. 240F.
Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct
Authority and the Prudential Regulation Authority. FS Registration Number 109997.

When you take out an investment product with us your capital is at risk and you may get
back less than you have put in. All references to taxation are to UK taxation and are based on Shepherds Friendly Society's
understanding of current legislation and H M Revenue and Customs practice which may change
in the future. For our With Profits plans investment growth is by means of bonuses, the
amount of which cannot be guaranteed throughout the term of the contract.